Tuesday, February 2, 2010

The Dangers of Uncertainty

Right now, the US has more natural gas than it knows what to do with. Gas supply is actually AT the US storage limit - we can't extract any more and still be able to store it. This has been driven by significantly improved production technology and the discovery of a number of new wells.

However, unbelievably, the natural gas industry is still building MORE rigs.

The only possible reason for this is that they believe that demand for natural gas will rise even faster than supply has, and thus the price of natural gas will increase.

What could possibly make them believe that could happen?

The energy crisis of 2007 certainly played a part - if they believe demand in 2007 was just a suggestion of vastly increased demand moving forward, that could be a good reason. However, coal and oil capacity is not expanding at the same rate, to my knowledge.

One very plausible reason is political uncertainty. Natural gas is much more CO2 efficient than other carbon-based fuels, and it's still economical, unlike solar and wind. If natural gas producers are betting on some form of energy bill, and a shift away from gasoline in cars towards electric cars (which will be powered largely from a coal and natural gas grid), and utilities will demand more natural gas if coal emissions become more expensive, this is a bet that their future will be incredible.

The problem is that nobody's building pipelines for this... so when their capacity comes online we're not going to have very much that we can do with it. Also, a number of car companies have put off electric cars (a bunch of the incremental demand for natural gas, a generally regional commodity) because they're not sure if they'll get subsidized through it and have no idea if it'll make a profit without subsidy because nobody's demonstrated a market for it.

And thus lies the problem with political uncertainty: some groups are going to move decisively, some groups won't move at all, and everyone is going to have to discount their future plans based on increased political risk.